Cost–Benefit Analysis of Proposed California Oil and Gas Refinery Regulations Daniel Gonzales, Timothy R. Gulden, Aaron Strong, William Hoyle C O R P O R A T I O N For more information on this publication, visit www.rand.org/t/RR1421 Library of Congress Cataloging-in-Publication Data is available for this publication. ISBN: 978-0-8330-9412-4 Published by the RAND Corporation, Santa Monica, Calif. © Copyright 2016 RAND Corporation R® is a registered trademark. Cover image: Shell Martinez refinery in Contra Costa County, California (via Contra Costa Hazardous Materials Programs) Limited Print and Electronic Distribution Rights This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited. Permission is given to duplicate this document for personal use only, as long as it is unaltered and complete. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial use. For information on reprint and linking permissions, please visit www.rand.org/pubs/permissions.html. The RAND Corporation is a research organization that develops solutions to public policy challenges to help make communities throughout the world safer and more secure, healthier and more prosperous. RAND is nonprofit, nonpartisan, and committed to the public interest. RAND’s publications do not necessarily reflect the opinions of its research clients and sponsors. Support RAND Make a tax-deductible charitable contribution at www.rand.org/giving/contribute www.rand.org Preface The state of California has proposed revised process safety management (PSM) and California Accidental Release Prevention regulations for oil and gas refineries that operate in California. The proposed regulations are more stringent than current federal regulations and are intended to improve refinery-worker and public safety and reduce air pollution. The objective of this study was to assess the costs and benefits of the proposed California PSM and California Accidental Release Prevention regulations. We esti- mate these costs and benefits in four categories: the costs to industry (to implement the regulation), the costs to society (pass-through of certain industry costs), benefits to industry, and benefits to society. This study examined the PSM activities called for in the proposed regulation. Many, if not all, of these costs will likely be passed on to California consumers in the form of higher prices for petroleum products. However, the new PSM regulations could improve safety at California refineries, which would, in turn, result in fewer major pro- cess incidents and fewer releases of hazardous materials from refineries. Because the number of major refinery incidents (MRIs) might decline under the proposed regula- tion, the regulation could provide safety and health benefits to the public in nearby communities and might provide other economic benefits. We examined these poten- tial benefits in this study. This report explains the proposed regulations, describes our methodology, and offers our findings and recommendations. Christine Baker, director of the California Department of Industrial Relations, and Alice Busching Reynolds, deputy secretary for law enforcement and counsel of the California Environmental Protection Agency, sponsored the research reported here. Under its Division of Occupational Safety and Health, the California Department of Industrial Relations operates a PSM unit, which enforces the California PSM standard (Cal. Code Regs. tit. 8, § 5189) and will be charged with enforcing the new proposed PSM standard for refineries, § 5189.1. iii iv Cost–Benefit Analysis of Proposed California Oil and Gas Refinery Regulations Infrastructure Resilience and Environmental Policy The research reported here was conducted in the RAND Infrastructure Resilience and Environmental Policy Program, which conducts analyses on urbanization and other stresses. This includes research on infrastructure development, infrastructure financ- ing, energy policy, urban planning and the role of public–private partnerships, trans- portation policy, climate response, mitigation and adaption, environmental sustain- ability, and water resources management and coastal protection. Program research is supported by government agencies, foundations, and the private sector. This program is part of RAND Justice, Infrastructure, and Environment, a divi- sion of the RAND Corporation dedicated to improving policy and decisionmaking in a wide range of policy domains, including civil and criminal justice, infrastructure protection and homeland security, transportation and energy policy, and environmen- tal and natural resource policy. Questions or comments about this report should be sent to the project leader, Daniel Gonzales ([email protected]). For more information about the RAND Infrastructure Resilience and Environmental Policy Program, see http://www. rand.org/jie or contact the director at [email protected]. Contents Preface ................................................................................................. iii Figures and Tables ................................................................................... ix Summary .............................................................................................. xi Acknowledgments .................................................................................. xxi Abbreviations ....................................................................................... xxv CHAPTER ONE Introduction ........................................................................................... 1 Background ............................................................................................. 1 Objectives ............................................................................................... 2 California Oil and Gas Refineries .................................................................... 3 Analytical Approach ................................................................................... 6 Organization of This Report .......................................................................... 9 CHAPTER TWO Overview of the Proposed Regulations ..........................................................11 Motivation for the Proposed Refinery Regulations ...............................................11 Basis for New Refinery Regulations ................................................................11 Changes and Differences Between Current and Proposed Regulations ........................13 Summary of Significant New Requirements .......................................................18 CHAPTER THREE Methodology .........................................................................................21 Costs and Benefits Considered ......................................................................21 Interview Process ..................................................................................... 24 Structured Interview Questions .................................................................... 24 Macroeconomic Modeling .......................................................................... 24 Costs of Major Refinery Incidents ................................................................. 26 Break-Even Analysis Approach ..................................................................... 27 v vi Cost–Benefit Analysis of Proposed California Oil and Gas Refinery Regulations CHAPTER FOUR Implementation Costs of the Proposed Regulation ...........................................29 Refinery Regulation Implementation Costs .......................................................29 Types of Costs Considered for Implementation of the Proposed Regulations .................29 Methods Used to Obtain Average, High, and Low Cost Estimates ........................... 30 Results ..................................................................................................31 Estimates of Start-Up Costs .........................................................................32 CHAPTER FIVE Major Incidents and Worker Deaths at California Refineries ...............................35 Definition of Major Refinery Incident ...............................................................35 The Contra Costa County Industrial Safety Ordinance .........................................41 Industrial Safety Ordinance and Non–Industrial Safety Ordinance Regulations and Refineries ......................................................................................... 42 Refinery-Worker Deaths ............................................................................. 44 Industrial Safety Ordinance Refinery-Incident History ......................................... 46 Non–Industrial Safety Ordinance Refinery-Incident History ...................................47 Costly Major Refinery Incidents ....................................................................49 CHAPTER SIX Impact of Major Refinery Incidents on California Gasoline Prices ........................51 U.S. Gasoline Prices ..................................................................................51 Gasoline Price Model .................................................................................51 Impact on Refinery Incidents on California Gas Prices ..........................................53 CHAPTER SEVEN Macroeconomic Impact Estimates ................................................................57